16 April 2019

leasehold

Home truth

  • Secretive but aggressive new land barons are making billions of pounds from homeowners in England and Wales
  • Feudal laws give these freehold tycoons myriad ways legally to extract money, from charging £179 to allow two screws in the wall to paralysing one whole town
  • As a parliamentary inquiry condemns the leasehold system, we reveal the faceless freeholders and their methods

By Martina Lees

He appears on no rich list, yet has quietly amassed more than ten times as many property titles as the Queen. From his 16th-century moated manor in Norfolk, Count Luca Rinaldo Contardo Padulli di Vighignolo collects drawings by Rubens and Michelangelo, hosts close friends of Prince William at his pheasant shoot – and controls 106,000 homes across Britain, as we publish the full extent of his property empire for the first time.

One of those homes is the 1960s leasehold flat of Maria Kostalas, 88, in the former mining town of Cramlington, near Newcastle. Old family photos surround her favourite armchair in the home she bought more than 20 years ago, yet now Kostalas has to pay Padulli’s empire £25,000 just so she can sell up. “My mum’s only wealth is in the flat, so £25,000 is just a pipe dream,” says Leo Kostalas, her son. “Elderly people are being held to ransom.”

As a leaseholder, Kostalas doesn’t own a single brick of her home – she only owns the right to live there for a set time. That right will end in 45 years. Then the flat goes back to the freeholder, Padulli’s Wallace Partnership Group, unless she hands them the £25,000 to extend her lease by 90 years. Banks won’t lend at all for the purchase of leases under 60 years, and many won’t lend for those under 80; that means shorter lease properties can only be sold to those who don’t need a mortgage – bringing the price down. Kostalas’s two-bedroom flat is now worth £40,000 at auction, instead of £90,000 with a long lease on the open market.

Maria Kostalas cannot afford to extend the leasehold on her flat

Padulli, 63, who used to run a hedge fund and has sold $100m of Old Masters to the Getty Museum, is one of a new breed of freehold tycoons making a fortune from homeowners. These largely unknown companies, often based offshore with complex webs of subsidiaries, reap a steady income from lease extensions, service charges for upkeep, consent fees for any changes and annual “ground rents” that buy nothing at all. The law allows freeholders to use “a smorgasbord of dirty tricks to extract money” through each of these mechanisms, says Louie Burns, a campaigner running a trio of firms that work only for leaseholders.

Like the great estates of Cardogan, Grosvenor and Portman in prime central London, the newcomers are cashing in on the leasehold system that dates back almost 1,000 years. After William the Conqueror claimed all of England for the crown in 1066, the Norman invader leased estates to his lords on strict conditions – and they, in turn, leased land to tenants.

Today, England and Wales are among the last countries in the world that still allow homes to revert to third-party landlords after a set time. Though Scotland and almost all Britain’s former colonies have abolished leasehold, it accounts for a quarter of property sales in England and Wales. And it is growing: 42 per cent of newbuild homes are leasehold – twice as much as 20 years ago, Land Registry data shows.

It echoes the age-old inequity between the landed gentry and ordinary people. Yet a millennium after its rise, the leasehold system might finally fall. A very English rebellion – politely stoked by a trio of working mothers, as Tortoise recently reported – has sparked a raft of official consultations on reform. The Law Commission, which advises parliament, is closing the last of its three current leasehold reviews this month, while the housing ministry is expected to announce ground rent reforms this summer.

And in a report last month, an inquiry by the housing select committee of MPs urged the government to replace leasehold with commonhold – the fairer system used by much of the world.

In his book-strewn Westminster office, Sir Peter Bottomley puts it more bluntly: “It’s not highway robbery; it’s home robbery.” The 74-year-old Tory MP is co-chair of the all-party parliamentary group on leasehold, which has swollen to 164 MPs and peers. “A lot of people have lost their homes because of the activities of some, in either using the law or misusing the law, or having more expensive lawyers.”

Lease extensions

Maria Kostalas is among an estimated 2.1m leasehold homeowners in England who have less than 80 years left on their lease. Yet this problem is perhaps more pronounced in her corner of Northumberland than anywhere else in the country, effectively paralysing the whole town.

In Cramlington, not only the flats but also most of the houses have been built with 99-year leases since the 1960s, by firms that have become part of Persimmon and Bellway, two of Britain’s biggest housebuilders. Now those leases are too short to remortgage or sell. Homeowners are forced to extend or buy out their lease; their freeholders – of which Padulli’s group is one of the most dominant in town – are cashing in. At a rally to help them last year, 300 leaseholders turned up. “There’s thousands of them,” says John Collins, the town council leader. “Many can’t afford to buy the freehold, so they’re stuck.”

Kostalas's flat is now worth less than half its value

Freeholders routinely give valuations “that are farcical – two or three times what we would negotiate down to”, says Sue Shaw-Toomey, a local solicitor. “It’s disproportionately affecting people in their fifties, sixties, seventies, who have lived in their homes for years, paid off their mortgages and think they are secure.”

Fees can spiral. Reynolds has had clients who were quoted £10,036 in 2015 and £17,126 in 2017 for statutory extensions, compared to Kostalas’ £25,385 in 2018. All of them had two-bedroom flats in Cramlington with leases of similar lengths. “So it’s gone up £15,000 in three years,” Reynolds says.

Simarc, the property management arm of Padulli’s empire, said the value of Kostalas’s flat had diminished because her lease had only 45 years left. Had she told them that she intended to sell, the firm says it would have been able to advise that extension cost could be settled from the sale price – enabling her to market the flat at its full value of £90,000.

Mick Platt, Simarc’s chief executive, says it manages 799 flat leases in Cramlington. “In the past we have reached out to residents to … encourage them to extend before the lease gets too short. Responses to this direct approach have historically been low.” To date, 40 per cent of residents have extended their leases, “virtually all on voluntary basis. Clearly there is an issue within the market whereby consumers are not being made fully aware of what they are buying and what their rights are.” The group is working with stakeholders and policymakers to ensure reform addresses this, Platt says.

Ground rent

Every year, leaseholders pay a total of at least £1.4bn in ground rent, government estimates suggest – and they get absolutely nothing for it.

Around the time his brother-in-law, David Cameron, became prime minister in 2010, William Waldorf Astor IV started amassing Long Harbour’s £1.4bn ground rent portfolio. Ownership is often via companies with nominee directors based offshore. With control of 160,000 leasehold homes, the group is now the second largest manager of freeholds in Britain after the multi-millionaire Vincent Tchenguiz’s Consensus Business Group, for which Astor used to work. Astor’s fund bought swathes of freeholds directly from housebuilders that, in many cases, had taken advantage of the government’s interest-free Help-to-Buy loans to sell the homes as leasehold.

That’s how Astor’s fund came to own the freehold of Joanne Darbyshire, 48, and her husband, Mark, 49. Using Help-to-Buy, the couple, with their children Adam, 18, and Heather, 10, paid Taylor Wimpey £399,950 for their newbuild house near Bolton, Greater Manchester, in 2010. They knew their £295 annual ground rent would double every decade – soaring exponentially until it reaches £9,440 after 50 years – so planned to buy the freehold before the first increase. Sales staff had told them they could do so any time for about £5,000, Darbyshire says. But six years later Taylor Wimpey had sold it to a Long Harbour firm, which quoted a neighbour £50,000 for their freehold. “We thought it was a typo – someone had put an extra zero.” It wasn’t.

Joanne Darbyshire co-founded the National Leasehold Campaign

With two other women who bought leasehold family houses in the northwest, Darbyshire, a company director, founded the National Leasehold Campaign group on Facebook. Now with almost 14,000 members, they have mobilised record responses to all the official consultations on reform. As their campaign made headlines, the government pledged to require nominal “peppercorn” ground rents for new homes (but not for onerous existing leases). Taylor Wimpey set aside £130m to compensate freeholders for converting “doublers” – ground rents that double every ten years – to inflation-linked ground rents, which rise at a slower pace and make the freeholds cheaper to buy. In a government-backed pledge last month, more than 40 developers and freeholders – including Long Harbour – committed to vary their leases in the same way.

Freeholders say only 12,000 homes have ground rents that double more frequently than every 20 years. “It’s 0.2 per cent of all leaseholds – that’s the scale of this issue – which, voluntarily, the development community and the freeholders have effectively solved,” Richard Silva, Long Harbour’s executive director, tells me in a conference call. “Using it as a platform to attack leasehold as a wider tenure, which has a huge amount of benefits for 4.3m leaseholders, that is a concern,” adds Jack Spearman, one of his directors.

Is the industry pledge a damage limitation exercise? Darbyshire is not buying the argument. She still hasn’t taken up Taylor Wimpey’s offer to change her doubler into one rising with RPI inflation, as that would quickly push the ground rent above 0.1 per cent of the purchase price. Banks including Nationwide and Barclays won’t lend beyond the 0.1 per cent mark – making it harder to sell. Darbyshire asks: “How on earth are you supposed to decide what to do next?” She is not alone: two years into Taylor Wimpey’s ground rent scheme, the housebuilder has paid out only 20 per cent of the £130m it budgeted, according to its annual results.

Consent fees

Want consent for a doorbell? That’ll be £60 (Metropolitan Housing). A dog? £80 (Consensus Business Group). A new mortgage provider? £200 (Ground Rent Income Fund). Freeholders charge permission fees for any changes, such as £3,000 to permit solar panels (in Cramlington, Northumberland) or £3,500 to allow a conservatory that doesn’t require the local council’s planning permission (in Ellesmere Port, Cheshire). That’s on top of a fee, typically £100, just for the leaseholder to ask the question.

The law requires these fees to be “reasonable” but does not define what that means, Burns says. He recently met an elderly lady in Liverpool who wanted to put a blind in her small kitchen window. “They charged her £179 for permission to put two screws in the wall.”

Like Astor and Padulli’s empires, E&J Estates has expanded in the past decade and now controls 50,000 freeholds through a web of 34 active ground rent companies. At its helm is James Tuttiett, 55, whose home is a Hampshire vineyard. A letter shows E&J quoting a doctor £6,250 for permission to reconfigure her young family’s three-bedroom flat in the northwest. E&J also wanted to increase her ground rent by £350, plus another £300 every 10 years. “We didn’t go for it,” says the doctor, 36, who spoke on condition of anonymity. She and her husband, 37, with their two young children, lost the £4,800 they had to spend on legal and survey fees to negotiate. E&J replies: “In cases where a major alteration is requested with substantial economic uplift, we may choose to request a permission fee. These renovations would have taken a number of months, involved significant changes to the property and involved a substantial liability for E&J as landlord.”

James Tuttiett, of E&J Estates

When questioned by MPs in the select committee inquiry on leasehold reform, bosses of both Astor and Padulli’s groups admitted that consent fees fund their “entire operation”, as all ground rent income goes straight to their investors. They defended it as covering their costs to “provide a service”. Sebastian O’Kelly, of Leasehold Knowledge Partnership, the secretariat of the all party parliamentary group on leasehold and commonhold reform, disagrees: “They’re remunerated by being a pain in the neck.”

The inquiry recommended that the government should legislate to cap consent fees in all leases at the freeholder’s actual costs. “Many of the permission fees and administrative charges we have heard about are plainly excessive, exploitative and yet another example of developers and freeholders seeking to extract money from leaseholders who have very limited recourse to challenge such fees,” its report says.

Changes made without consent can cost leaseholders far more, even if they didn’t commit the breach themselves. Anne Heelan, a dentist, lost about £100,000 when their freeholder “sabotaged” two sales, citing an unauthorised change to the layout of their Edwardian flat in west London made at least 21 years and three owners prior. Heelan, 50, and her husband needed more space for their son, 6, so had found a buyer. But their freeholder, an investor who also owned the upstairs flat, demanded £50,000 to update the floorplan on the lease. After two years, £40,000 in legal costs and a High Court case that the freeholder did not defend, he threatened to wrap their flat in scaffolding to fix fictitious structural damage from the layout change. So last year the couple gave up and sold to him at a £55,000 discount to their £750,000 asking price. “We knew he would keep blocking sales while we would rack up more legal bills,” Heelan says. “It nearly broke us.”

Service charges

In the corner of Jay Beeharry’s penthouse living room stand two crates full of paperwork under a velvet cloth – evidence of the battle she and her neighbours have fought against spiralling charges for the upkeep of their ornate Victorian block of 21 flats in southeast London. “I liked the view,” the interior designer, 41, gestures at her panorama of the City skyline. “It’s killed 10 years off my life.”

Jay Beeharry has fought against spiralling service charges

They have challenged their freeholder, part of Compton Group, in tribunals four times over the past five years, including over repairs that ballooned from about £80,000 to £600,000. The day before Christmas in 2013, Compton applied to force the works through – eventually costing Beeharry £42,000. “We all felt like a tonne of bricks had fallen on us,” she says.

Along the way, Beeharry and two neighbours have lost six sales between them. “I’m totally stuck, and that at my age,” says Nina Rautio, 61, a retired opera singer who had performed with Pavarotti. The third neighbour, a 32-year-old sales executive who asked not to be named, is facing repossession after her £55,000 freeholder bill was added to her mortgage. “I may even have to go bankrupt. It’s really hard to talk about it,” she says. “I’m on antidepressants; I’ve had to be signed off work. You work hard for years and then it’s taken away from you. You feel like a failure. It’s just not right.”

Though residents have won the right to manage the building themselves last year, their £500,000 is lost.

Nina Rautio has battled against service charge rises on her flat in Sydenham

Compton, run by a Swansea housebuilding family that controls 55,000 freeholds, denies any allegation of mismanagement. “We went to the first-tier tribunal three times in connection with this major works project. At no time was our conduct criticised in those hearings,” it said. Works escalated after they discovered that the building was converted so poorly by its previous owner that it would have collapsed “if we had not got involved”.

Unfair service charges cost leaseholders as much as £1.4bn a year, the all-party parliamentary group on leasehold believe. Its co-chair, the Labour MP Jim Fitzpatrick, has seen charges for lifts in blocks with no lifts, and for garden upkeep in places with no gardens, across his London Docklands constituency.

It gets most lucrative for freeholders who use their own companies for upkeep, management and insurance. They can charge enormous commissions – as high as 40 per cent on buildings insurance, according to the Financial Conduct Authority – and pass the bill on to leaseholders.

At a riverfront scheme in Canary Wharf where flats are worth as much as £3.5m, another group of residents gather in secret to tell me about the service-charge battle with their freeholder – ultimately owned by the Monaco billionaire John Christodoulou’s Yianis Group. Though each flat pays about £10,000 a year for upkeep, the garden path kept crumbling. The windows kept leaking. The air-conditioning kept breaking – finally costing £1m to replace. They had no accounts for four years, until just before they took the freeholder to tribunal.

In 2016, leaseholders finally won a ruling to replace Christodoulou’s agents with a court-appointed manager. Invoices presented to the tribunal showed how procurement companies – which Yianis denies owning – charged leaseholders double what contractors had billed for repairs. The tribunal found the landlord had failed to maintain the estate and failed to provide adequate evidence for expenditure.

Residents at Canary Wharf Riverside have had disputes with Yianis Group over service charges

“But we still have to fight,” says one resident, who is too afraid to be named. Ahead of their victory, more than 100 members of the residents’ association were threatened with defamation proceedings. (Yianis says they made “untrue allegations”.) Since then, the freeholder’s bids to chip away at the new manager’s powers through 22 court proceedings has cost leaseholders at least £1m in legal fees. “It’s a war of attrition,” the resident adds. “I feel like we’ve lost, though we’ve won.”

Legal fees

Even if a leaseholder wins, they can almost never recover their legal costs from a freeholder. Yet a freeholder can, in many cases, pass on theirs – even if they lose. The first-tier tribunal has little power to award costs to either side. However, case law allows freeholders to reclaim their legal bills via service charges or administrative fees, unless leaseholders apply to a judge to limit these.

Unusually in civil law, leasehold has “an entirely one‑sided cost regime” favouring the powerful, says Martin Boyd, chair of the LKP campaign. Since wresting control of a development of luxury flats in Kingston, southwest London, away from the mighty Tchenguiz interests in 2013, he now regularly represents leaseholders at tribunals.

Tycoon Vincent Tchenguiz with his sister Lisa

Leaseholders are often liable for freeholder legal fees that dwarf the amount in dispute. Last year, Richard Barclay, 45, won a £1,200 reduction of the £10,100 service charge bill on his flat in west London. Then Quadrant Property Management Limited sent him a new service charge bill of £61,300 for their lawyer fees. “All of this because I dared to ask: ‘Why has the management contract not been re-tendered in 25 years?’ My life is a permanent state of emergency,” the health entrepreneur said.

When I mention the case in an interview with James Brokenshire, the housing secretary, he appears shocked. “I want to ensure that we have a leasehold market where people are able to challenge,” he said. “If there are obstacles like costs of court that are getting in the way and stopping that from happening, then, absolutely, that’s something we need to respond to.” An aide later confirms that Brokenshire intends to “close the legal loopholes which allow freeholders to unjustifiably recoup legal costs from leaseholders”.

After I contact Quadrant, its lawyers reply: “Our client has been embroiled in litigation with Mr Barclay for almost two years. The cost our client has incurred are a direct result of the applications Mr Barclay has made, in which our client has successfully defended its position.”

But a week later, Quadrant writes to the first-tier tribunal stating that it had removed £49,000 in legal costs from Barclay’s service charges. A jubilant Barclay emails: “You are having a profound effect on leaseholders lives and mine too, positively!”

Forfeiture

The sledgehammer in the freeholder’s arsenal is forfeiture. Unlike repossession, where the home is sold to clear debts and the owner gets the difference, it leaves a leaseholder with nothing (except still having to repay the mortgage, if they have one). The freeholder takes all.

Though a Law Commission report recommended 13 years ago that forfeiture should be abolished, successive governments have done nothing to reform it. “It is incredibly rare that it actually happens,” Wheeler, the housing minister, told this year’s parliamentary inquiry on leasehold. Yet a 2011 case has made forfeiture “a remedy of first port of call, as opposed to a last port of call, if there are service charge arrears”, Amanda Gourlay, a barrister, told the same select committee.

About 120 forfeiture cases are heard every year. Freeholders can apply to confiscate your home if you owe ground rent of more than £350, or any amount for more than three years. They can also do so if you breach any terms in your lease.

Ground rent shortfalls of £350 can lead to forfeiture

In a widely reported case last September, a court ordered forfeiture of Charles McCadden’s £600,000 flat after he made structural changes without consent from his freeholder, who lived downstairs. McCadden had bought the flat, in a Victorian terrace in northwest London, with cash in 2016, then fitted a new bathroom, kitchen and central heating system.

Now Nathan Jones, a former British Army major, and Aideen Seymour, a teacher, could lose their £1m southwest London flat after letting it out while he temporarily worked for a bank in Europe. When Jones told the freeholder, which owns about 50 such freeholds, of their intention to let their half of the period terrace, the firm threatened forfeiture unless they paid £30,000. Its grounds? An antiquated clause in the lease described the flat as for the “benefit of the lessee and his family”. However, a third party was living in Jones’s flat when they bought it from the previous leaseholder, and the upstairs flat – owned outright by the freeholder – was also rented out. Jones says this makes the subletting clause contractually unfair. He won at first-tier tribunal; then lost in the upper tribunal. Now renting themselves, they are awaiting a ruling by the Court of Appeal. “Our hope is to sell the flat as it holds almost a foreboding for us. We never want to live there again,” Jones wrote in evidence to MPs.

“I feel very strongly that both the leasehold system in the UK and the legal framework that surrounds it is heavily skewed in favour of the freeholder with large amounts of money to defend their position… Only my single minded pursuit of the belief that this is an injustice is pushing us forward.”

Portraits for Tortoise by Tom Pilston

Further reading